Authors

History

Goldman School of Public Policy Working Paper (October 2004)

Abstract

We deﬁne the irreversibility eﬀect and demonstrate its importance in problems involving investment
decisions under uncertainty. We establish several analytical and numerical results that suggest both
that the eﬀect holds more widely than generally recognized, and that an existing result (Epstein’s
Theorem) giving a suﬃcient condition for determining whether the eﬀect holds can be applied more
widely than previously indicated, in particular to problems involving intertemporally nonseparable
beneﬁt functions. We further show that a low elasticity of intertemporal substitution will however
result in failure of the eﬀect, but that the eﬀect will hold if the value of information increases in
the degree of ﬂexibility.